Independent System and Market Operator (ISMO) Bill [B9-2012]Task Team report-back


07 August 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

A task team, consisting of the Departments of Energy and Public Enterprises, National Treasury and Eskom, had been set up to prepare inputs for the processing of the Independent System and Market Operator Bill. It was to perform a scenario building exercise and further due diligence on the future of the transmission sector vis-a-vis the ISMO Bill. Members were told that protocol problems had prevented the work of the team from proceeding during the previous two months. Members were very unhappy about this situation, as the legislation was needed urgently.

Eskom explained how the transfer of assets would affect their operations and creditworthiness. Members did not agree as the result of the implementation of the Bill would lead to a state-owned enterprise. There was discussion on the need for an outside consultant to make an input.

The Committee instructed the team to provide a draft scenario building exercise by the first week of September. The due diligence process had to be completed within two months. This would enable the Committee to process the Bill before the end of 2012. This deadline could not be compromised. The Committee would also invite public submissions on the issue.

Meeting report

The Chairperson said that there had been a number of assertive presentations on the Independent System and Marketing Operator (ISMO) Bill. These had influenced Members. There was a need to conduct further due diligence. The Committee had hoped to process the Bill during August, but realised that further consideration was needed.

Independent System and Market Operator (ISMO) Bill Task Team report-back
Ms Lesego Molatlhwe, Director-General: Department of Public Enterprises (DPE) spoke on behalf of the task team. She said that the team had been meeting. At the last meeting, it had been reported that Eskom would have to be mandated to conduct further due diligence. The Minister of Public Enterprises had now been briefed on the contents of the Bill, and shared the concerns that had been raised over the proposed removal of the transmission system from Eskom. The Minister's thoughts would soon be conveyed in a letter to the Committee.

Mr L Greyling (ID) was not sure how to respond. The Bill was of vital importance, but Members were now being told the process was on hold. He would have expected some work in the previous two months. Members were not able to pass the required legislation.

The Chairperson asked when the report could be expected.

Ms Molatlhwe said that the time frame given had been four months. There had been some progress, and it might be completed in less than this time. It should take four months once the service provider was appointed.

Mr Greyling hoped he was not the only Member feeling outrage. The due diligence requirement had been indicated in the White Paper of 1998, and even then Members had felt it was long overdue. It now seemed the ISMO Bill would only be implemented in late 2013. Parliament could not work with this time line. It had to be fast-tracked.

Mr J Smalle (DA) said that the Committee could not proceed without the due diligence report. He thought that the two and a half months determined at a previous meeting was ample time. Concerns should have been raised at the time. Appointing another consultant would cost money, and this function should be performed by Eskom. He could not see the need for outside consultants even though Eskom would be affected.

The Chairperson said that while Eskom was a central player, the other parties also had an important role to play. He agreed that the White Paper had set a time frame.

Mr Mongezi Ntsokolo, Group Executive, Eskom, said that the request for a consultant had come from the government departments involved. This was perhaps required for impartiality. Eskom had done a due diligence study and had made its input. The input covered the impact of taking the ISMO function out of Eskom, security of supply as national control was responsible for distribution and restoration of supply. It covered environmental health and safety aspects. Someone had to be held responsible for safety, and a protocol would have to be put in place. Financial flows had to be considered if ISMO was to buy power from independent power producers (IPPs). Revenue would have to be recovered from customers. Eskom had made a recommendation based on their studies covering three aspects of system management that could be handed over to ISMO. Other aspects could follow later. The first phase would be to ring-fence the phases within Eskom. The second would be to form a subsidiary company to handle the business. IPPs had to be assured that they would get returns on their investment. The third phase would be to look at the cash flows. Initially Eskom would still handle the revenue aspect but would later render an auditing capability. The final phase would look at Eskom doing instruction for switching. With a tight power system, national control should not be done from outside of the system. Reserve margins should improve in time, reducing the risk of outages. Some responsibility could then be shifted to network operators.

Mr Greyling replied that these were important issues, but did not address the matter at hand. Members still needed to know what the implications would be for transferring Eskom assets. The legislation was sitting with the Committee. Eskom had been given over two months to complete the report, but this had not been done. The Committee should set the time frame and not have it held in abeyance. There were other players in the task team who seemed to be leaving all the responsibility with Eskom.

The Chairperson said that tasks had been assigned to the team as a whole in the previous term of Parliament. He hoped that whatever had been done in the previous two months had been through teamwork. He was looking to the team for reassurance. He asked what the value of the assets in question was. The desktop due diligence talked about the impact of the transfer.

Mr Ntsokolo said that the team working on the due diligence was working on exactly that scope. One thing to consider was the technical separation of distribution from transmission. Assets had to be valued and compensation paid. When Eskom raised funds, it used its balance sheet as a surety for loans. The third aspect was separating the assets into different companies. Eskom would have to go back to lenders and ensure that they were satisfied with the process. There was the issue of further borrowing capacity for Eskom. The balance sheet would look totally different after the transfer. The company, and the different new units, would have to be rated. The head office of Eskom would have to be unbundled. Many different services had been centralised. Some assets and resources might be left stranded. It was a complex exercise. These matters had not been considered when the ISMO Bill was drafted. In the international sphere, both models were used. His major concern was the risk to security of supply.

Mr Ntsokolo said that a change to the accounting model, to the depreciating asset value basis, was being considered. Part of the work of the team would be to choose the correct method. The assets in question were about 7.5% of the company's value.

The Chairperson asked what the total asset base was.

Mr S Mayatula (ANC) shared the concern of Members. He accepted that the due diligence had not been completed. The Committee had to set a time for this to be done. Eskom was subjectively involved in the process. He thought it would be more appropriate for an outsider to be making an input.

The Chairperson wanted to be convinced about the four-month period.

Mr Jeffrey Quvane, Director, National Treasury, said that four months was the tightest deadline that could be imposed on the team. Statistics had to be gathered. He felt that six months would be a more comfortable time frame.

The Chairperson said that Eskom had highlighted areas that had to be added to the original requirement.

Mr Smalle said it was clear that a framework had been developed. It was clear that certain work had been done, and the information on this should be available. He felt that the team should report back within two months, even if it could not finalise its work. The whole process could not be held back for four to six months.

Mr Greyling was very uneasy. Nothing had been done in the previous two months. This was disrespectful to the Committee. The Bill should be processed before the end of 2012. The Committee needed to move forward on this. The implications of the asset transfer seemed to be mainly an accounting issue. An outside perspective was needed, and the other players could make their comments on these inputs. The Committee needed to be strict on this issue.

The Chairperson was tempted to agree with Mr Greyling. However, some protocols had to be observed. Eskom could have more creative. The team should note the proposals being made and their implications. The confidence of the Committee was being dented.

Ms B Ferguson (COPE) had also thought that Members should end the meeting with more clarity. The political head had to give authority. She asked if the team had ever voiced concerns over not completing the process with the Chairperson. A step-by-step approach was needed. The asset transfer should be an accounting action, albeit a huge one.

The Chairperson asked what the implication of the 7.5% transfer of assets would be on loan cognisance. Members needed to be convinced.

Mr Ntsokolo said that currently Eskom was vertically integrated. There was one deliverable and creditors were assured that debts would be paid. Changing the model would destroy the current value chain. If any of the components broke down, quality assurance and assurance of delivery would be compromised. The system would no longer be integrated. Rating agencies looked at the different customer ratings and their ability to pay for services. In the new model, agencies would have to look at ISMO and other components. Different entities would have to be managed and regulated.

The Chairperson said that there was a legacy issue. South Africa had maintained its financial credibility through the global economic crisis. He asked if there was any reason why agencies would lose confidence in South Africa and Eskom. With the backing of National Treasury, assurances could be given should there be any sign of instability.

Mr G Selau (ANC) was worried that the argument put forward by Eskom looked like one a company would put forward if a division was to be sold. Eskom and ISMO would both be state-owned enterprises. The loans were authorised by Cabinet. It was merely a case of restructuring Eskom. They would still all fall under the DPE. It was not clear how Eskom would lose current financial ratings and investor confidence.

Mr Mayatula was as angry as other Members, but proposed that the Committee move forward slowly. Eskom would not have done anything without the approval of the Chairperson. The anger was based on the time being consumed by the process. The separation would happen despite Eskom's resistance. Even if the team was given another three months, this would mean that the matter would not come before the Committee before the end of the Parliamentary year. Instead they should report back within two months.

Mr S Radebe (ANC) said that further postponements should be avoided. No further extensions should be allowed.

Mr Greyling said that the need to follow the current protocol had not been communicated to Members. He did not want to see similar excuses being offered two months later. It was time to move ahead with the legislation. Other public submissions were needed. A time line had to be set to allow Parliament to approve the legislation before the end of 2012. This message had to go to Eskom.

The Chairperson said that the first construction of alternative power sources should have been started already. This was being delayed due to policy refinement. The ISMO Bill was one of the tools to create a conducive arrangement for IPPs. Eskom had said that they would welcome the input of IPPs. More power would be generated. He understood the urgency felt by Members. He was at a loss to explain the lack of teamwork that he perceived. Eskom was shouldering the blame most of the time. He asked Members if they would welcome submissions even if there was no public hearing process. He agreed that it was time to move quickly. Outside expertise needed to be tapped into. He agreed that the target date for passing the legislation should be the end of 2012. Regular feedback was needed, even it was distributed to Members through electronic channels. Scenario building could be done faster. This was an aid in the decision-making process. The White Paper said that transmission should be a stand-alone function. How to achieve this was the question. He called on the team to produce a first draft of the scenarios within one month. Submissions would be invited within the following month.

The Chairperson said that the process seemed to be moving in circles. This was why external reinforcement was needed. The first draft should be provided in the first week of September, and the due diligence process should be completed within two months. Fortnightly progress reports were needed.

Mr Ntsokolo asked if the Department of Energy (DoE) was leading the team.

Ms Nelisiwe Magubane, DoE Director General, said that the Department was happy to lead the process but then the team members had to play their part.

The Chairperson called on stakeholders to eradicate the unfortunate past. He repeated the time frames set by the Committee. It must be clear that Parliament would conduct its own process, and would test the team's progress against this process.

Mr Radebe said that the team was wasting government money by coming to the Committee with nothing to show. When they returned to the Committee it must not be a holiday trip.

The Chairperson said that there was linked legislation. There was nothing stopping the team from completing their work earlier. In terms of economic development, the energy sector must not compromise growth. He had asked the National Electricity Regulator of South Africa (NERSA) to indicate the extent of their preparedness for the generation of power by IPPs. There were various lead times to passing the Bill.

Mr Selau asked how feasible it would be to create a holding company to manage the assets of Eskom and ISMO.

The Chairperson said that National Treasury was there to approve or provide assurances for loans. The reform of the electricity sector would have to be considered. Institutional arrangements would have to be reviewed.

Committee Minutes, Report on visit to Cairo, Agenda for Next Week’s Meeting
The Committee considered the minutes of meetings held on 1, 14, 17, 21 and 28 February 2012.

The minutes of the meeting of 1 February were accepted. Mr Greyling commented that the minutes reflected the urgency that was needed to pass the ISMO Bill.

The Chairperson said that he was being pro-active in getting the feedback required from the National Economic Development and Labour Council (NEDLAC).

The minutes of the meeting of 14 February were adopted. Mr Radebe asked what had happened to the proposed invitation to the African Union Energy Conference.

The Chairperson said that he had received a personal invitation. The DoE should invite the whole Committee and not just the Chairperson. He instructed the Secretary to pass this on to DoE for future events.

The minutes of 17, 21 and 28 February were adopted with minor changes.

Mr Radebe commented that the South African Bureau of Standards (SABS) needed to make an input. The public should be made aware of the energy-saving nature of household appliances.

The Chairperson said that the matter would be pursued during the current term of Parliament.

Mr Selau found it an inconsistency that a report on a visit to Cairo was moved for acceptance by Mr Lucas and seconded by Ms N Tinto, who had been on the visit. The Chairperson said it had been a battle to have both of these Members present at the same meeting, as they had to vouch for the accuracy.

Mr Mayatula queried the wording of one of the resolutions taken at the meeting of 28 February. Mr Radebe said that if he were to submit a report, it would be up to him to verify the accuracy of the report. A Member who had not been present at the event which was the subject of the report could not do this.

The Chairperson previewed the Committee's meeting for the following week. It would address issues raised at the recent public hearings, but would focus on liquid fuels.

Mr Lucas said that there was no transformation in the companies supplying liquid fuel.

The Chairperson suggested that the Committee should first hear the proposals made by the DoE. The matter had been raised during 2010, and the Department would give a response.
The meeting was adjourned.



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